SEC Move Will Spur Adoption Of Electronic Trading

The Securities and Exchange Commission voted Wednesday to revise the "trade-through" rule, giving investors the option of having orders executed immediately or be canceled.

The trade-through rule currently prohibits an exchange from bypassing, or trading through, a better price quoted on a competing exchange. The New York Stock Exchange has been a proponent of the trade-through rule; the exchange often quotes the best bid and offer prices. Under the trade-through rule, it therefore gets first dibs on most orders. The NYSE's competitors, including all-electronic exchanges such as Nasdaq, have argued that the rule gives the NYSE an unfair advantage and hurts investors who want orders executed immediately.

Abolition of the trade-through rule could have spelled the death knell for the NYSE's floor-based trading system, which is already under attack from all-electronic exchanges. About 20% of all trades in NYSE-listed securities are processed by all-electronic exchanges.

In a statement, the NYSE praised the SEC's action as "ensuring the protection of the investing public while effectively advancing the competitive landscape in America's equities marketplace."

The new rule enables investors to classify orders as "immediate-or-cancel," meaning that the order must be executed immediately at the best price available or else be canceled. The rule doesn't define "immediate," but does state that any exchange that fails to respond to orders within one second due to system malfunctions would be classified as a "problem market" and could be bypassed by other exchanges.

Early last year, the SEC proposed allowing investors to opt out of the trade-through rule. In the rule adopted Wednesday, the SEC substituted the less-radical "immediate-or-cancel" option.

The NYSE has taken steps to accommodate electronic trading, in part in reaction to the SEC's moves, says Celent Communications analyst Jodi Burns. The rule is likely to force non-electronic regional exchanges to build or buy electronic trading systems, she says.

Last year, the NYSE upgraded its Direct Plus system to enable "sweeping," a process for filling buy and sell orders at prices that deviate from the best price by a few pennies. It also upgraded Direct Plus' ability to handle orders of any size and to let investors use the system as often and as rapidly as they like. Previously, Direct Plus was restricted to order sizes of fewer than 1,100 shares and investors had to wait 30 seconds before entering another order.